Making In-kind RRSP contributions? It’s possible!

13 February 2018
by
National Bank

Did you know that cash RRSP contributions are not the only type of
contribution you can make? Indeed, as long as you remain within your
contribution limit, in-kind contributions to a registered account
are also possible, without incurring fees or paying any commissions.

Several investment products can be used to make an in-kind
contribution including stocks, exchange-traded funds, and mutual
funds. Before proceeding, one should be aware of the rules that govern
this alternative form of contribution as well as the benefits and
drawbacks associated with it. First, the shares or units must be
contributed at a price which corresponds to the fair market value of
the securities at the time of the contribution. Second, although the
transaction involves neither the sale nor the repurchase of the
contributed securities, the contribution is nonetheless considered a
deemed disposition from a tax perspective, meaning that it triggers a
taxable capital gain for the year during which it occurs.

However, if the market price of a security when contributed turns out
to be less than its average cost, the resulting capital loss cannot be
used to reduce the taxable gains realized on other transactions. It is
not permitted to claim a loss on an investment you still own while
getting a tax deduction for an amount equivalent to its contribution.
You can’t have your cake and eat it too. A taxpayer who would attempt
to circumvent this rule by selling a security he holds in a
non-registered account and repurchasing it in a RRSP without waiting
for the mandatory 30-day minimum period to elapse, would be well
advised, prior to proceeding, to consult a tax specialist or the
Canada Revenue Agency (CRA) with regard to the treatment of
superficial losses. In any event, once transferred to a registered
account, the investments held will be able to grow sheltered from the
tax collector’s reach.

Obviously, the contributed securities must be RRSP eligible as
determined by the CRA. The Agency is not too picky, however, since the
inventory of eligible investments includes the shares of most of the
companies listed on the major stock exchanges of the world. On the
other hand, shares traded on over-the-counter markets—such as the Pink
Sheets in the U.S.—do not always meet the qualifying criteria.
Moreover, if you hold an investment which was previously eligible but
no longer qualifies, you will need to swiftly get rid of the holding
or withdraw it from your account to avoid the penalty that your
failure to comply would entail.

Furthermore, even though your portfolio may be comprised of a large
number of international stocks, the tax treaty signed with the United
States, which exempts from any withholding income derived from an
American source in Canadian registered pension plans, does not apply
to income generated by other foreign investments.

Registered accounts for which contributions are not tax deductible
may also be the object of an in-kind contribution, and the rules
pertaining to deemed dispositions stay applicable in their case. But
since the tax shelter status that Canada grants to TFSAs and RESPs is,
by definition, not recognized in the agreement negotiated between the
two countries, income earned from American investments held in these
types of accounts is subject to withholding at the source, by the
Internal Revenue Service of the United States.

Furthermore, if in-kind contributions are allowed, so too are
withdrawals. For example, the holder of a RRIF account may very well
choose to receive his payments in-kind rather than in cash. However,
keep in mind that these payments remain taxable and that any amount
paid above the required minimum would be lessened by a progressively
increasing rate of withholding. Therefore, the annuitant must have
enough disposable cash on hand in his account to cover the taxes owed
according to the value of the securities withdrawn.

The conceivable strategies prove numerous and, among the factors to
consider, the expected yield and return of the investment figure at
the top of the list. Some taxpayers have even gone as far as to
withdraw securities from their RRSPs—despite the tax consequences—in
order to contribute them to their TFSAs with the aim of wresting from
the CRA’s grasp, in near perpetuity, the future capital gains and
income they anticipate.

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National Bank Direct Brokerage (NBDB) is a division of National Bank Financial Inc. (NBF) as well as a trademark used by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. NBF is a wholly-owned subsidiary of National Bank of Canada, a public company listed on the Toronto Stock Exchange (TSX: NA). NBDB provides order execution only services and makes no investment recommendations. Clients are solely responsible for the financial and tax consequences of their investment decisions.